When the stock market dives, take a deep breath.
It may be counter-intuitive but rest assured, every seasoned financial professional will tell you that. Knee jerk moves with money often end badly.
Indeed, as the billionaire investor Warren Buffett once noted: “Unless you can watch your stock holding decline by 50 percent without becoming panic-stricken, you should not be in the stock market.”
It’s during these whipsawing times that the value of diversification – not having all your financial eggs in one basket – becomes ever more apparent. That’s not only important for what kind of stocks and bonds you’re invested in, but the kind of money vehicles and asset classes you have in your financial plan as well.
For instance if your retirement relies solely on a stock portfolio, then market volatility likely is much more of a risk than a situation where your retirement will be supported by income from several different vehicles with varying degrees of correlation to market ups and downs.
And that variety can allow for different strategies when markets go awry…like the option of using life insurance to supplement retirement income instead of a flagging equity portfolio. That’s because you can build cash value in a whole life policy, in addition to protecting your family.
Sudden market drops also point up the value of long term investing horizons. The market comes back from every downturn. It always does. It just takes time.
Time horizons obviously will vary from person to person. A single young professional just starting out typically will have a longer time horizon than an older family man or woman looking at retirement in a few years.
Of course that single young professional can make some choices that, in the long run, may make circumstances easier when he or she eventually becomes an older, family person. Some of those choices are straightforward, like contributing to retirement plans and taking advantage of company matches. But beyond those there are options for insurance and annuities that can soften market blows down the road.
Again, it’s a matter of personal circumstances that everyone has to consider.
A crazy market is just a good reminder to do it.